ATO Interpretative Decision
ATO ID 2002/90 (Withdrawn)
Superannuation
Reasonable benefit limits: Determination of an arm's length salary. Use of remuneration survey. Recognition of high level of risk and responsibility.FOI status: may be released
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This ATO ID is withdrawn from the database because it contains a view in respect of Division 14 of Part III of the Income Tax Assessment Act 1936 and Part 5A of the Income Tax Regulations 1936 (the RBL provisions). The RBL provisions do not apply for the 2007-08 income year and later income years. This ATO ID continues to be a precedential view in respect of decisions for income years up to, and including, the 2006-07 income years.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Are the amounts requested for the relevant three consecutive years reasonable arm's length salaries for the taxpayer and can the taxpayer have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner?
Decision
The amounts requested for the relevant three consecutive years are not reasonable arm's length salaries for the taxpayer. However, the taxpayer can have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner.
Facts
The taxpayer applied for the determination of an arm's length salary.
Included in the application was a remuneration report which claimed that the taxpayer's arm's length salaries should be valued at a particular rate for three consecutive years.
The taxpayer's remuneration package consisted of actual salaries, employer superannuation contributions and fringe benefits for the requested three consecutive years. The taxpayer sacrificed significant amounts of salary for superannuation and fringe benefits in those years.
The taxpayer is an associated employee and Director of the entity which had a high gross income. The taxpayer worked an average of 70 hours per week.
The Commissioner consulted the remuneration survey published by a widely recognised remuneration consultant.
The Commissioner considered that the nature of the taxpayer's employment was comparable to that of a Chief Executive Officer (CEO) under the remuneration tables of the survey.
An upper quartile salary for CEOs who work 60 hours per week is established under the tables. This amount represents the total salary package paid to employees performing comparable duties.
There were a high level of risks and responsibilities associated with the position.
Arm's length salaries were determined by the Commissioner and informed to the taxpayer. A Highest Average Salary (HAS) was calculated to reflect these arm's length salaries.
The taxpayer applied for a re-determination of the arm's length salary that was originally allowed. Included in the application was a Transitional Reasonable Benefit Limits ("TRBL") application form, and a remuneration report which claimed that the taxpayer's arm's length salaries should be valued at a rate higher than previously allowed and for three different consecutive years.
Amended arm's length salaries were allowed by the Commissioner for the requested three different consecutive years, and a HAS was calculated to reflect these arm's length salaries.
The taxpayer has now objected against the Commissioner's decision on the grounds that the arm's length salaries should be valued at a rate higher than previously allowed.
Reasons for Decision
The arm's length salaries requested by the taxpayer varied from the upper quartile salary for CEO positions published by the remuneration survey.
The Commissioner accepted the upper quartile figure from the remuneration survey because of the hours worked by the taxpayer.
The taxpayer was the Director who was responsible for the overall financial performance of the entity. The taxpayer's employment was compared with the position of CEO to allow the maximum salary available to the taxpayer under the remuneration survey tables.
The nominal salary figures for the relevant three years were reduced by the same proportion as the taxpayer had sacrificed actual salary to superannuation and other fringe benefits. These amounts were deducted from the total salary package in order to arrive at a 'salary' as defined under subregulation 47(1) of the Income Tax Regulations 1936 (ITR 1936).
A 15% bonus was given to the taxpayer to cover the additional risks and responsibilities associated with the taxpayer's position with the company was allowed and was added to the reduced salary figures.
There was nothing unusual in the application to indicate why the published salary statistics should not be used. Because of this, the Commissioner chose not to accept the salary figures claimed by the taxpayer.
Having regard to subregulations 47(3) and 47(4) of the ITR 1936, it is the opinion of the Commissioner that the taxpayer can have arm's length salaries greater than the arm's length salaries that were previously allowed.
Date of decision: 19 July 2001
Legislative References:
Taxation Administration Act 1953
Section 14ZL
Section 14ZQ
Section 14ZU
Paragraph 14ZW(1)(c)
Section 14ZY
Subregulation 47(1).
Subparagraph 47(3)(c)(ii).
Subregulation 47(3).
Subregulation 47(4).
Subregulation 53FA(1).
Subregulation 53FA(2).
Keywords
Salary sacrifice
Reasonable benefit limits
Transitional RBLs
Highest average salary
ISSN: 1445-2782
| Date: | Version: | |
| 19 July 2001 | Original statement | |
| You are here | 23 November 2007 | Archived |